Controversial Option Discussion Of The Day - Calls and Puts

[mazzatelli1000]

I adhere to the 'if it ain't broke, don't fix' philospohy', but am always looking at more efficient ways to go about doing things. Take no notice of the actual strikes, they are all ficticious. Thought I'd throw up a replica of an IC with the debit & calander set ups just to explain what I'm thinking.

So back to.. am tossing up between static hedging & just adjusting the IC as I go, difficult to explain as it all depends on my view at the time & what the market throws at me as to how I would adjust. Suppose all I'm after is some feedback on whether other traders go with built in protection or adjusting during play?

Maybe some definitions will help
Static replication is to help minimize dynamic hedging costs and risks.
So for the IC, the wings are the static hedge as it offsets partially all of the risk of the short strangle. What remains is dynamically hedged.
In your example there are even more static hedges which reduces the bet you are taking - hence the cost.

My approach is that I will have a view on vol or direction - always defined at the beginning of the trade
e.g. Short Vega.
So be long the butterfly at neutrality
When vol declines are in my favour I will either
1) offset as it was a binary vol bet
2) if I believe the spot will be choppy - offset enough so the remaining trade is a punt or will tighten the static replication [wings] to lock in profits.

If the vol bet goes wrong I quickly offset and reallocate to another trade. No adjusting to defend losses and no alteration of my intial view of vol/direction [I guess I have faith in my models].

I begin to delta hedge the remaining position with spot 2 weeks before expiry, but not as much in the last week as delta accumulates
While this is happening I usually have a basket of flys, which are hedged with an index straddle [correlation matrix] or index futures.

So my approach is to hedge the entire book as a primary concern, the individual position secondary

 

[mazzatelli1000]

I mostly do high prob ICs & always look to adjust way before any pain sets in, this usually takes the form of adding deltas in the form of calanders or debit spreads.

My suggestion would have been to not trade wide IC's because IMO they are difficult to hedge when things move against you [I am not a fan of the R:R], but it seemed to be what your comfortable with hence "if it ain't broke, don't fix it" comment.

I have seen suggestions of adding wings while its moving against the IC, but most place shorts > 1 sigma from neutrality, it is highly unlikely the spot will spike even further.
And the market gods tend to like moving the underlying against you near expiration, leaving little time for subsequent adjustments to have a chance to come into fruition

Maybe it was just my personal experience though

 

[mazzatelli1000]

I tend to ignore HV, perhaps at my peril, rely only on IV .

Don't ignore HIV "where it's been and where it's at"

 

[wayneL]

Your approach of writing one side then hedging if need be with the other is what I tried doing awhile back, however I could never get it right & ended up chasing & defending to no avail.

I just want to stress that I only write one side if there is a statistical reason to write one side and not the other. This is reasonably rare with indices and more likely with commods. I am far more likely to enter flies or condors straight off the bat and send in more flies or verticals to shift the goalposts as needed.

This also depends on proximity to expiry.

Mazza's point of using spot to hedge in the last couple weeks is a great idea. At least during market hours. I'll hedge with spot during the day and adjust EOD.

FWIW

 

[Grinder]

What remains is dynamically hedged.
In your example there are even more static hedges which reduces the bet you are taking - hence the cost.

Thanks guys, alot of food for thought here. Will need to go back & familiarize myself with disection before venturing into IBs, but like the possibilities presented. I tend to be overhedged most of the time, suppose i'ts just a comfort thing.

 

[cutz]

Hi Guys,

Here's one for today, " Shorting premium is a way that many derivatives traders consistently make money"

I don't really consider it to be controversial but I'll be interested to find out if this is how you option enthusiasts play it.

I kept the quote in it's original form but my interpretation is "the only way".

 

[mazzatelli1000]

Hi Guys,

Here's one for today, " Shorting premium is a way that many derivatives traders consistently make money"

I don't really consider it to be controversial but I'll be interested to find out if this is how you option enthusiasts play it.

I kept the quote in it's original form but my interpretation is "the only way".

Yeah baby, qualify for portfolio margining and short all that naked premium!!!
Looks like a Charles Cottle quote

I tend to be short gamma more than long.
Not fussed about being long/short delta or vega.

But I think the general interpretation of short premium is to sell options and wait to collect your money i.e. positive theta trading?

 

[wayneL]

Hi Guys,

Here's one for today, " Shorting premium is a way that many derivatives traders consistently make money"

I don't really consider it to be controversial but I'll be interested to find out if this is how you option enthusiasts play it.

I kept the quote in it's original form but my interpretation is "the only way".

I see two types of options education/newsletter vendors.

1/ The guys that seem genuine

2/ Hypesters

Type one tend to concentrate on market neutral strategies mainly, with appropriate uses for other strategies as well.

Type two on OTM long puts and calls and/or credit spreads.

Though I've seen type one promote credit spread, but a lot more responsibly than say the type of w@nkers I've been writing about on my blog.

Type one are after long term repeat sales. Type two after $3 -5k... take the money and run.

It kind of says something to me.

My view, in general terms, is that long premium is directional and speculative... trying to hit homers. Short premium for making a consistent income.

This is not to say long premium dudes can't make money, but short premium dudes probably are more consistent.

OK that's my sweeping generalizations.

 

[cutz]

Thanks guys for allowing a peek into your style,

That's the zone i prefer to be in, short gamma overall but limited risk, although at the moment I'm biased to the downside and long vega, constantly anticipating a massive correction that ain't happening, gotta stop jumping at shadows.

Mazza must agree with you there, the original statement can easily be misinterpreted and used by spin artists as Wayne has pointed out, in fact one of the first books i ever read on options talked about going naked because hedging cuts into profits/90% of option expire worthless ect. ect. i remember thinking at the time that this must be the way to go.

Makes me cringe now.

 

[Grinder]

That's the zone i prefer to be in, short gamma overall but limited risk, although at the moment I'm biased to the downside and long vega, constantly anticipating a massive correction that ain't happening, gotta stop jumping at shadows.

know what ya mean. Banked up on DDs waiting for the vega tsunami now. Sure enough it won't come, or at least won't come when I want it to.

I am far more likely to enter flies or condors straight off the bat and send in more flies or verticals to shift the goalposts as needed.

Now this is something thats worked for me, setting up my condors & placing mini debit spreads like claymores here & their to keep me in the game.

I have seen suggestions of adding wings while its moving against the IC, but most place shorts > 1 sigma from neutrality, it is highly unlikely the spot will spike even further.
And the market gods tend to like moving the underlying against you near expiration, leaving little time for subsequent adjustments to have a chance to come into fruition

I like to manage my ICs alittle different to others, don't like playing too close to the fire so I'm usually out with less than a month till detonation. Adding extra wings on the move never offered me much, wacking em on at inception proved more useful. Once it's game on their managed seperately, maybe over managed alot of the time but it's a work in progress.

Sorry for cutting into the discussion of the day, perhaps I should put in an IC thread. as you were.

 

[mazzatelli1000]

Now this is something thats worked for me, setting up my condors & placing mini debit spreads like claymores here & their to keep me in the game.

I am making the assumption that you aren't very confident with your directional abilities, hence the wide IC's, so how do you fare when placing these debit spreads and wings as you are taking a directional punt?

I like to manage my ICs alittle different to others, don't like playing too close to the fire so I'm usually out with less than a month till detonation. Adding extra wings on the move never offered me much, wacking em on at inception proved more useful. Once it's game on their managed seperately, maybe over managed alot of the time but it's a work in progress.

Yeah, can you imagine doing all those static hedges in the Oz market? You would get killed on -edge alone!!

 

[Grinder]

I am making the assumption that you aren't very confident with your directional abilities, hence the wide IC's, so how do you fare when placing these debit spreads and wings as you are taking a directional punt?

Correct! Can't pick for you know what. I fare better than doing nothing, mostly place em front month a few strikes in from the short strike of the losing side of my IC. If the index keeps running towards the losing side it reduces the bleeding enough to allow for a quick retreat & take whatever profits I get from the winning side. If the index flips & goes back the other way than I take it off for a small loss & continue to play out the IC. ce la vie.

any suggestions?

Yeah, can you imagine doing all those static hedges in the Oz market? You would get killed on -edge alone!!

Yep can imagine, got wounded many times. Glad to be hiding out in the US

 

[mazzatelli1000]

Correct! Can't pick for you know what. I fare better than doing nothing, mostly place em front month a few strikes in from the short strike of the losing side of my IC. If the index keeps running towards the losing side it reduces the bleeding enough to allow for a quick retreat & take whatever profits I get from the winning side. If the index flips & goes back the other way than I take it off for a small loss & continue to play out the IC. ce la vie.

any suggestions?

Wayne has been doing these longer than all of us put together - adding and liquidating flys as he mentioned would probably be the best.

Maybe reduce the debit at risk whenever possible - it is much easier on the mind to hedge and trade when you have reduced your risk IMO - for reference look at Cottles "Miracle in Aug - GOOG" in the book.

 

[Grinder]

Cottles "Miracle in Aug - GOOG" in the book.

Where can I find this mazza?

btw love the new avatar would be even better if it could change maybe every month or so, we would'nt want to get bored

 

[mazzatelli1000]

Where can I find this mazza?

btw love the new avatar would be even better if it could change maybe every month or so, we would'nt want to get bored

Hey G,
It's in the Butterfly dissection - Chapter 6
I have the archive somewhere of his discussion with his students if you would like it.

Re: the avatar - yeah the plan is to have a new avatar girl for each month.

 

[cutz]

Hi Guys,

I have another topic for today,

Option trading is a zero sum game, if the market makers are making money, who's losing money ?

 

[Grinder]

Hi Guys,

I have another topic for today,

Option trading is a zero sum game, if the market makers are making money, who's losing money ?

everyone & noone who knows whos on the other end of what, someones trash is anothers treasure.

Hey G,
It's in the Butterfly dissection - Chapter 6
I have the archive somewhere of his discussion with his students if you would like it.

Re: the avatar - yeah the plan is to have a new avatar girl for each month.

no need just found it, thanks.

 

[wayneL]

Hi Guys,

I have another topic for today,

Option trading is a zero sum game, if the market makers are making money, who's losing money ?

I have some views on this, but will wait to see what others say.

 

[cutz]

No bites on this one Wayne,

Looks like you may have to fill us in.

 

[skyQuake]

ok i'll bite.

The retail guys paying the spread lose money. After punters jump in MMs can usually hedge with existing options/squaring with other mms/physical market.

Seems like theres a bit more to it though?